No rate cut balm for distressed economy

The Reserve Bank of India (RBI) treaded cautiously and maintained status quo on interest rates in its sixth bi-monthly policy review announced on Wednesday. This is the last policy review in the current fiscal. Guided by the six-member Monetary Policy Committee (MPC), which deliberated for two days on the contours of the policy for the next two months, the apex changed its stance from ‘accommodative’ to ‘neutral’ with the objective of reining in retail inflation at 5 per cent in the fourth quarter of this fiscal.

As a consequence, the key repo rate at which RBI lends to banks remains static at 6.25 per cent, while reverse repo is unchanged at 5.75 per cent. Perhaps, RBI chief Urjit Patel and his MPC colleagues want to wait till banks pass on to end users the rate cuts already announced by the apex bank so far, before going for another rate cut. As Patel mentioned at his post-policy review media interaction, RBI has reduced key interest rates by a significant 175 basis points (1.75 per cent) since January 2015, but banks have so far reduced lending rates by just 80 to 85 basis points.

Obviously, there is scope for the lending rates to go down further, but banks are unlikely to take cue at this point of time, given the fact that there is, of late, a visible increase in non-performing assets (NPAs) or bad loans. A rate cut even by 25 basis points by RBI on Wednesday would have nudged banks to go in for more cuts in lending rates, in addition to improving overall sentiment.

The haphazardly-executed demonetisation exercise announced on November 8 last year by the Narendra Modi government had adversely impacted the economy and dampened the sentiment. The apex bank also admitted this and cut its growth forecast by 30 basis points for FY17 to 6.9 per cent from the earlier projection of 7.1 per cent.

This is the second time that the RBI has pruned its growth forecast after the note ban came into effect. In the last monetary policy review on December 7 last year, the apex reduced GDP growth forecast for the current fiscal to 7.1 per cent from the earlier 7.6 per cent. In RBI’s own admission, the note ban will shave 0.7 per cent of GDP and lead to slowdown this fiscal. A rate cut, as India Inc points out, is needed to revive demand hit by cash chaos, and spur economic growth.

India Inc has also expressed concern over RBI changing its policy stance from ‘accommodative’ to ‘neutral.’ In a sense, the industry is right. With this shift in the policy stance, RBI may not go for rate cut even in its next policy review that falls in the new financial year beginning April 1. The only option left before the banks is to pass on the benefits of earlier rate cuts to loanees. That is unlikely to happen unless the central government nudges them. Still, the RBI believes Indian economy will clock a growth of 7.4 per cent in 2017-18!

By P Madhusudhan Reddy